ECONOMICS
FISCAL POLICY
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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An increase in public goods and services
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A decrease in public goods and services
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Either A or B
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None of the above
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Detailed explanation-1: -Fiscal Multiplier is often seen as a way that spending can boost growth in the economy. This multiplier state that an increase in the government spending leads to an increase in some measures of economic wide output such as GDP.
Detailed explanation-2: -According to Keynesian economics, increased government spending raises aggregate demand and increases consumption, which leads to increased production and faster recovery from recessions.
Detailed explanation-3: -Fiscal policy that increases aggregate demand directly through an increase in government spending is typically called expansionary or “loose.”
Detailed explanation-4: -Inflation: With the rising prices, the government has to keep on increasing public expenditure to carry out its functions and maintain the supply of public goods intact.
Detailed explanation-5: -First, if the government increases its purchases but keeps taxes constant, it increases demand directly. Second, if the government cuts taxes or increases transfer payments, households’ disposable income rises, and they will spend more on consumption. This rise in consumption will in turn raise aggregate demand.